Research

IN-BRIEF: SINOPHARM (1099 HK)

Sinopharm’s 3Q17 net profit decline of 16% YoY means that consensus expectations for 12% growth in 2017 just became a whole lot more unrealistic. The company is suffering from a double whammy of rapidly deteriorating operating performance stemming from regulatory changes, while finance costs are ballooning as it sells ever-greater quantities of receivables in an attempt to flatter financials. We think these trends will become more acute in 4Q and would not be surprised if there were a material profit miss. Given high leverage and an inability to generate recurring operating cash flows, a capital increase is likely. Results are…
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Insights

PINDUODUO

Window-dressing rather than fraud

Mark Webb · 23 November 2018

Pinduoduo (PDD) has been accused of inflating GMV, overstating revenues, understating staff costs and, therefore, under-reporting its losses. In our view, the majority of allegations made by short-seller Blue Orca (BOC) are not supported by the evidence. We agree that PDD’s GMV is almost certainly exaggerated, but this is likely well known. BOC’s other arguments are less compelling. Its specific allegations about PDD inflating revenues and understating losses are not adequately established. In addition, while it flags inconsistencies over staff numbers, it is not evident that staff costs are artificially depressed. We argue that PDD is an unattractive investment, but…
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A2 MILK

SELL: Ready to pop

Nigel Stevenson · 15 November 2018

A2 Milk (A2M) has achieved super-normal profitability by selling a “special” kind of infant formula to Chinese consumers through unofficial distribution channels. The problem is that A2M has limited IP to protect its product, and competitors like Nestle are closing in. Meanwhile, new Chinese e-commerce rules may hamper its distribution network. It is difficult to see how A2M can protect its returns when it spends far less on marketing and research than peers. Consensus forecasts 30% compound revenue growth for two years on widening margins, placing it on 22x FY20 PER; we see slower revenue growth and contracting margins resulting…
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CORPORATE TRAVEL

Short-seller claims lacks substance

Gillem Tulloch · 31 October 2018

We’re no fan of acquisition-driven business models, such as Corporate Travel (CTD), but they’re not a crime. The allegations presented thus far by hedge fund VGI Partners against CTD appear, in our opinion, to lack substance and in some instances are plain inflammatory. The short-seller alludes that CTD is faking its overseas profits but fails to provide hard evidence, or explain how this would impact CTD’s financials. In its defence, CTD has provided a fairly comprehensive rebuttal. This shorting campaign against CTD appears to be working as VGI has made allegations against an expensive stock, not because they have much…
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